Friday, March 22, 2019

Defense Department Fails its Audit

Last November, the Pentagon announced that it had failed its financial audit - the first audit that it ever had to undergo. The auditors hired to conduct the audit "disclaimed" an audit opinion meaning they were unable to render an opinion because the records were, in some cases unavailable, and in other cases, nonexistent.

The Defense Department has struggled for many years to comply with the law that mandates an audit. It is the largest of all Federal agencies with more than $2.7 trillion in assets and more than two million personnel working all over the world.

One of the problems is that the military was not built for accountability but was built incrementally over time to win wars. Today, it finds itself composed of a multitude of overlapping and diverse financial and inventory systems and processes.

We do not know what the final cost of the audit totaled. One estimate last year was $918 million - $367 million for the audit and $551 million to correct problems disclosed by the audit (that's enough to buy nine F-35 fighters).

The Heritage Foundation made the following recommendation concerning future audits of the Defense Department:
To make the audit more effective, Congress must take the lead. Lawmakers must engage with  the Pentagon and, together with the Federal Accounting Standards Advisory Board, implement commonsense changes to the audit. For example, Congress could remove non-value-added areas such as balance-sheet valuation and accounting for the existence and completeness of major military equipment - an area in which no problems were found in the 2018 audit.
It would probably be an unsuccessful defense for contractors to cite DoD's failure to pass an audit as justification for its own deficiencies. We don't think that contract auditors will buy the argument that we are no worse than you are.

Thursday, March 21, 2019

Stipends Paid for Business Use of Personal Cell Phones

We recently encountered a situation where a Government contracting officer questioned stipends paid to two employees to cover the business use of their personal cell phones. We do not know whether the contracting officer is acting on recent guidance or if he/she is acting on his/her own accord. We did note that the challenge was made without benefit to a regulatory basis such as the FAR Part 31 cost principles.

Contrary to this particular contracting officer's challenge, the practice of paying a stipend to employees for business use of personal cell phones is very common among small businesses and small business Government contractors. Paying stipends for such use benefits the Government because the cost of a stipend is usually significant less than the cost for the contractor to purchase a separate cell phone plan and assign it to the employee. It also benefits the employee who otherwise, would need to carry around multiple cell phones. Stipends do not represent windfalls to employees. Using personal phones for business use often requires employees to increase their usage limits at extra cost. A stipend then is simply a reimbursement for business expenses borne by the employee(s). Stipends for business use of personal cell phones is very similar to someone using their POV (privately owned vehicle) for business use and obtaining reimbursement from their employer. No one has ever questioned the propriety of that.

The questions that contractors should ask themselves before paying stipends are these:
  1. Is a cell phone necessary for the conduct of contractor business?
  2. If yes, is the employee willing to use his/her personal cell phone for business purposes in exchange for a stipend?
  3. If yes, is the stipend reasonable, that is, is it less than the cost of a company sponsored plan?
The costs, whether in the form of a stipend or a new business-only service must be allocated correctly. A determination needs to be made whether to charge the costs direct to a contract or to an indirect cost pool for allocation across multiple cost objectives.

Unless the employee remains tethered to a desk full time, the practicalities of a cell phone should be rather obvious. Cell phones make employees more efficient in a lot of ways. They can conduct business while driving between clients. They can conduct business during down time. They can return phone calls more expeditiously and not have to wait until they return to their desks before checking messages.

Are we off base here? Let us know.

Wednesday, March 20, 2019

Internal Control Noncompliances in Purchase Card Program

Just like commercial companies including Government contractors, the U.S. Government issues purchase cards to selected employees to streamline the acquisition process. Purchase cards provide a low-cost, efficient way to obtain goods and services directly from vendors. All companies have (or should have) effective internal controls to manage the cards and ensure the propriety of purchases paid through such cards. Larger companies often have internal audit departments that periodically assess employee compliance with such controls. Smaller companies may not have the resources available to dedicate to such internal auditing. As a result, they may be at more risk for fraud, waste, and abuse than larger companies. No company (or Government contractor) that we know of shares the results of their internal auditing publicly. So we never really know the effectiveness of controls put in place by contractors or the level of compliance achieved. We don't have that problem with internal audits by Government entities. Most of their internal control reports are available to the public. And these reports are often instructive for companies to review and find out what works and what might not be effective when it comes to protecting company assets.

The State Department's Office of Inspector General recently concluded an audit of the Department's purchase card program to determine whether (i) card holders used their Government card only for purchases allowed by laws and regulations, (ii) card holders recorded purchases, documented purchases, and reconciled monthly statements as required by Department policy, and (iii) the Department administered the purchase card program in accordance with established policies. Contractors with purchase card programs should study this report and assess their level of vulnerability in inappropriate purchasing.

The IG reviewed 580 purchase card transactions selected from nearly 2,000 State Department card holders and noted only 17 exceptions. Three purchases had been split into six separate transactions to circumvent micro-purchase limitations. Eleven transactions were used to inappropriately pay for catering services. Most notably however, the IG did not find any instances of cardholder fraud, wast or abuse.

The IG did find that record keeping was a mess. They found that 27 percent of the 580 transactions were missing one or more pieces of required documentation and nine percent failed to provide evidence that monthly statements were reconciled (as required). These record keeping deficiencies were attributable to the fact that cardholders did not maintain required documents.

Had this failure occurred at a Government contractor, there wold be a strong likelihood that contract auditors would have questioned the costs for lack of support and equally likely that the contracting officer would have sustained the finding. Would you want that to happen?

Read the full State Department report here.

Tuesday, March 19, 2019

GAO Criticizes DOE for Subcontractor Oversight Practices

Prime contractors are responsible for oversight of their subcontracts. That is a well grounded and established principle of Government contracting. The Defense Contract Management Agency (DCMA) and Defense Contract Audit Agency (DCAA) dedicate a significant number of resources to ensuring the propriety of subcontract costs passed along to the Government through prime contractor billings. These include pre-award policies and procedures involving purchasing systems and consent to subcontract requests all the way to incurred cost audit procedures.

The GAO was asked to review contracting at DOE, the largest civilian contracting agency where 90 percent of their appropriations are spent on contracts. The review focused on (i) the parties that participated in DOE's largest prime contracts and the extent to which they subcontracted their work, (ii) the extent to which DOE ensured that those contractors audited subcontractors' costs, as required, and (iii) the extent to which DOE ensured the contractors met other subcontract oversight requirements.

GAO reviewed the 24 largest prime contracts which totaled $23.6 billion in fiscal year 2016 obligations. Of that $23.6 billion, prime contractors subcontracted about $6.9 billion (30 percent) to thousands of subcontractors.

GAO found that DOE did not always ensure that contractors audited subcontractors' incurred costs as required in their contracts. GAO's review of 43 incurred cost assessment and audit reports identified more than $3.4 billion in subcontract costs that had not been audited and some subcontractors remained unaudited or unassessed form more than six years (important due to the six year statute of limitations).

GAO blamed this lax oversight on DOE headquarters lack of procedures or guidance that requires local offices to monitor contractors to ensure that required subcontract audits are completed in a timely manner, consistent with federal standards for internal control. Without such procedures or guidance, unallowable costs may go unidentified beyond the six year statute of imitation period preventing DOE from recovering those costs.

GAO made several recommendations that DOE develop procedures that require local offices to monitor contractors to ensure timely completion of required subcontract audits. DOE concurred with most of the recommendations.

You can read the full GAO report here.

Monday, March 18, 2019

Bid Protest Costs must be Adequately Supported to be Reimbursable

When companies are successful in winning a bid protest before the GAO (Government Accountability Office), the GAO often also recommends that the successful protester be reimbursed reasonable costs of filing and pursuing its protest. Such a recommendation to reimburse successful protesters however, is not a blank check. A protester seeking to recover the costs of pursuing its protest must submit sufficient documentation to support its monetary claim.

Although the GAO has recognized from time to time that the requirement for such documentation may entail certain practical difficulties, it does not consider it unreasonable to require a protester to document in some detail the amount and purposes of activities associated with the claimed effort and establish that the claimed hourly rates reflect the concerned individuals' actual rates or compensation. Ultimately, the burden is on the protester to submit sufficient evidence to support its claim. That burden is not met by general, inadequately-supported statements that particular costs have been incurred.

A company name AeroSage LLC learned about the need to adequately support its claim the hard way. AeroSage won its bid protest and was invited by GAO to submit a proposal for its cost in pursuing the protest. AeroSage submitted a claim totalling $26 thousand. Ultimately, all it got was the $350 EPDS (Electronic Protest Docketing System) fee. AeroSage's claim consisted primarily the hours incurred by its President in pursuing the bid protest (110 hours) at $250 per hour. The problem for AeroSage however was that there was no data to back up the number of hours or the hourly rate other than general statements that the amounts represented accurate data or data that was inconclusive as to its relevance to the claim.

The full GAO decision can be found here.

Friday, March 15, 2019

Government may be Awarding Too Many OTAs (Other Transaction Agreements)

The Project on Government Oversight (POGO) published a new asking whether the benefits of using "Other Transaction Agreements" (OTAs) are commensurate with the risks (see: Other Transactions: Do the Rewards Outweigh the Risks?). OTAs have been around for a long time but are being used more frequently these days to streamline the procurement process. POGO wonders whether the increased use of OTAs is putting the Government (and taxpayers) at undue risk.

The original idea behind OTAs is that nontraditional vendors might be interested in entering the Government marketplace with a streamlined procurement process. OTAs are not subject to FAR or DFARS, or CAS, or really, any type of Government oversight. Nontraditional contractors that were unable or unwilling to gear up to understand, implement, and comply with procurement regulations and open themselves up to Government oversight, would be willing to come to the table and bring with them innovative solutions that traditional contractors were not offering. The reality, however is that these speedy buying procedures are being leveraged by large traditional contractors that are looking to boost their bottom line by avoiding normal contract administration, oversight, and accountability protections.

The POGO report cites a number of flaws inherent in the OTA process. First, the Government is at a disadvantage with determining price reasonableness. There is no requirement to furnish cost or pricing data which means that in order to determine price reasonableness, the contracting officer must rely totally on outside sources. Second, because OTAs are not subject to FAR (and related regulations), the Government (and public) lose a degree of transparency in the process. The Government must take the word of contractors as to the propriety of claimed costs - there are no audit clauses in OTAs.

POGO argues that OTAs are not serving the stated intent of luring non-traditional contractors to the Federal marketplace. It nots that 72 percent of research OTA funding and 97 percent of prototype OTA funding went to traditional DoD contractors while a DoD IG (Inspector General) report concluded that OTAs have not attracted a significant number of  nontraditional defense contractors to do business with the Government.

POGO includes some recommendations that include scaling back the use of OTAs to truly nontraditional contractors (as initially envisioned), adding a layer of oversight to ensure taxpayers are protected and renegotiate some OTA as FAR contracts.

The full report can be found here.

Thursday, March 14, 2019

Timecard Fraud Cost the Government $1.4 Million

This fraud was allowed to go on for 17 years. How?

Michelle Holt was a DoD employee at Joint Base Langley-Eustis. She was a salaried employee and as such, was entitled to overtime pay if authorized by her employer as well as other forms of holiday and vacation pay and premium pay for holidays worked.

The fraud was first identified by the DoD-IG during a routine audit that identified anomalies in Michelle's time and attendance records. The matter was turned over to investigators (the Air Force Office of Special Investigations (AFOSI) and the Defense Criminal Investigative Service (DCIS)) who ultimately found that from December 2001 to July 2018, Michelle falsely claimed more than 42 thousand hours in unauthorized overtime for hours she did not work as well as other amounts of unauthorized holiday leave, sick leave and annual leave.

In case you're trying to do the math, 42,000 hours equates to 2,470 hours per year. When the normal worker is paid for about 2,080 hours per year (40 hours times 52 weeks), this is almost twice as much as a normal work week. Stated another way, Michelle would have to work 17 hours a day, five days a week for 11 years to book that many hours.

How is this allowed to go on for 17 years? Where was her supervisor? Where were the finance people in charge of managing budgets? Where were the controls in payroll processing? There were serious internal control deficiencies in the process.

According to the Justice Department press release, Michelle accomplished the fraud by making manual retroactive adjustments to protected computer time and attendance systems to add overtime, reverse leave taken and reverse holiday leave. In doing so, she used another employee's log-in information without that employee's knowledge or authorization.

The Government calculated that over the 17 year period, Michelle's enriched herself by $1.4 million. She has been ordered to prison for four years and has been ordered to pay restitution. Good luck getting the restitution - "she used the money she received from the fraudulently obtained overtime and leave payments to buy items for herself and for her family" - and when she's released at age 56, won't have much opportunity to earn enough to ever pay back the $1.4 million. At the court ordered payment plan of $200 per month, it will only take her 7,000 months (or 583 years) to pay it all back.

Contractors, are you vulnerable to such a scheme? Do you have internal controls in place to reduce the likelihood of something like this happening in your location?

Wednesday, March 13, 2019

White Paper on Conforming CAS to GAAP

The Cost Accounting Standards Board (CASB) released a Staff Discussion Paper (SDP) today on conforming CAS to GAAP (Generally Accepted Accounting Standards). The full text of the SDP is available here. Comments are welcome and must be received by May 13, 2019 (60 days from now). This SDP is the first step in the rule-making process. Next would be the advanced notice of proposed rule-making, a proposed rule, and a final rule.

The 2017 NDAA required the CAS Board to review CAS and conform them, where practicable to GAAP in order to minimize the burden on contractors while at the same time, protecting the interests of the Federal Government.

The SDP identifies the differences and similarities in the purpose and application of overlapping, but distinct, accounting standards. CAS is designed to provide protections to the Federal Government by achieving  uniformity and consistency in the cost accounting practices used by contractors for measurement, assignment, and allocation of costs to Government contracts. GAAP on the other hand, is a set of financial accounting standards established by the FASB (Financial Accounting Standards Board) for recording and reporting financial information. Financial statements produced using GAAP focus on the financial performance of segments of the company and the entity as a whole. The focus of CAS is at the contract level while GAAP is focused on a higher level - product line, segment, or entity level.

In developing the SDP, the CAS board followed these guiding principles:

  1. Reduce CAS requirements where practicable to minimize the burden on contractors while protecting the interests of the Government
  2. Consider whether the proposed action would result in a net burden reduction (would the benefits of eliminating a requirement in one cost accounting standard be outweighted by the burdens made by changes required in other CAS standards
  3. Consider whether other CAS requirements may protect the Government's interests when evaluating the potential risk of any gaps created by relying on GAAP instead of CAS.

This initial SDP focuses on only two CAS standards; CAS 408 (compensated personal absences) and CAS 409 (depreciation of capital tangible assets). Presumably analysis of the remaining standards will come later.

You can read the entire SDP here.

Tuesday, March 12, 2019

The Government's Use-it or Lose-it Spending Spree

American Transparency (website: is a public charity who's Government oversight reports present hard data so citizens can "follow the money". Its stated goal is to enhance public discourse with delineated facts.

The group recently published an oversight report entitled: The Federal Government's Use-It-Or-Lose-It Spending Spree - How the Federal Government Spent $97 Billion in One Month. True to its goal, American Transparency doesn't try to blame anyone or any organization in particular for wasteful spending but just points out the facts related to (fiscal)  year end spending. But the listing of items purchased does give one pause to wonder why the Government needs fidget spinners, alcoholic beverages, crab and lobster, and expensive furniture ($50 thousand chair).

American Transparency believes that the use-it-or-lose-it mentality has been a problem forever. Agencies feel that they need to spend their budgeted funds in order to secure at least the same amount the following year. That's not necessarily true. It could be that Agencies are holding back funds during the year to cover unforeseen contingencies and as the year progresses and those contingencies do not materialize, are comfortable spending the funds on other needs. Or, perhaps there is just more pressure on contracting officers to get contracts awarded by year-end. Some in the Government feel that contractors intentionally drag their feet in negotiations knowing that if they wait until year-end they will be able to negotiate a more favorable price because of pressure on contracting officers to finalize contracts by year-end.

The report contains two appendices that list the top 100 spending categories and the top 100 contractors receiving year-end spending spree funds. You can download and read the full report here


Monday, March 11, 2019

The Inaugural Air Force Pitch Day was Considered a Success

Last week, the Air Force awarded contracts to 51 companies in a matter of minutes at its inaugural "Air Force Pitch Day".

The Air Force Pitch Day is modeled after commercial investment pitch competitions that attempts to deliver a faster (and presumably smarter) approach to compete for ideas in technology. The process is a significant departure from the lengthy contractual process typically expected of the military. If focuses on rapidly awarding Phase I SBIR (Small Business Innovation Research) contracts to companies based on a simpler streamlined evaluation of white papers and in-person presentations.
How does a pitch day work?

Prior to the pitch day, Air Force contracting officials reviewed 417 submissions received during a 30-day application period and then invited 59 businesses to pitch their proposals in person. Of those 59 companies, 51 received an initial award of up to $158 thousand with an initial payment within minutes of their presentations.

The average amount of time to award contracts and pay companies (using a Government credit card) was a mere 15 minutes. Under traditional contracting practices, the average amount of time to award SBIR Phase I contracts is 90 days - a period where many small businesses and startups cannot survive through without funding.

Besides the 51 contracts awarded on the spot, the Air Force, the previous week, through a series of "rapid contracting sprints", awarded 122 Phase I SBIR contracts and 69 Phase II contracts. The Air Force wants to organize and do more of these type of activities all across the country where the Air Force performs acquisitions.

The prospect of obtaining funding immediately upon contract execution is a great benefit to small businesses who, with funding in place, can concentrate on contract performance rather than figuring out cash flow problems.

Friday, March 8, 2019

Navy Contracting Officer Accepted more than $1.2 in Bribes

A senior procurement official for the Navy has plead guilty to accepting more than $1.2 million in bribes over a ten-year period.

The Navy civilian (Mr. Barroso) held his trusted position as a Master Scheduler for 22 years. A Master Scheduler is an approving official responsible for approving material purchases, service contracts, vendors and payments to vendors. Allowing a single person to fulfill all of those responsibilities is a major (and obvious) internal control deficiency that the Navy should have been cognizant of and have adjusted its policies, procedures, and practices long ago.

Beginning in 2008, this employee conspired with Bauer, a Ventura County businessman who operated three entities that received Navy contracts. The two entered into an arrangement in which Barroso would issue and approve work orders and purchase orders to Bauer's companies. Bauer then submitted false invoices from his companies and then Barroso would approve those invoices and Bauer would receive payment. A nice tidy package - Barroso issued contracts and approved payment for services under those contracts. The trouble is, no work was ever performed.

Barroso's kickbacks amounted to 50 percent of the false invoices. Prior to 2011, kickbacks were paid in cash. After 2011, kickbacks were paid to a company that Barroso set up for the purpose of collecting bribes. Government investigators were able to identify $1.2 million in kickbacks. Obviously there could have been more. In addition to the kickback charges, Barroso also admitted to income tax violations.

Barroso's sentencing is scheduled for June. Last November, Bauer plead guilty for his part in the conspiracy and will be sentenced in June as well. You can read the Justice Department's press release on this matter here.

The Justice Department did not disclose how the fraud was uncovered. It probably was not a whistleblower. The Justice Department usually discloses fraud uncovered by whistleblowers. Perhaps it was just someone in the Navy finance office wondering what services the Navy was getting for all those payments.

Thursday, March 7, 2019

Solicitation Required Independent Verification - Not Self-Certification

Graham Technologies was one of 552 companies submitting proposals to DHHS (Department of Health and Human Services) for IT (Information Technology) supplies and services. There were a number of qualifying factors including verification that the company had an adequate accounting system.  DHHS fund Graham's proposal unacceptable under the verification of an adequate accounting system requirement and therefore ineligible for further consideration.

Graham appealed the disqualification on the basis that DHHS's actions were unreasonable because Graham felt that it had complied with the requirement. Well, it either did or did not, right. That should be easy enough to figure out - unless the solicitation was ambiguous. But the solicitation was not ambiguous, according to the GAO who heard the appeal. The solicitation contained the following provision:
... the Offeror must provide in its proposal a contact name and contact information . . . of its representative at its cognizant DCAA [Defense Contract Auditing Agency], DCMA [Defense Contract Management Agency], federal civilian audit agency, or third-party accounting firm and submit, if available, a copy of the Pre-Award Survey of Prospective Contracting Accounting System (SF 1408), provisional billing rates, and/or forward pricing rate agreements. 
Graham did provide an audit report number, the date of the report, and contact information for the cognizant DCAA office and representative. However Graham  did not include any verification from DCAA itself. DHHS concluded that the information Graham provided did not satisfy the requirements of the solicitation to provide verification from DCAA. Graham argued that the term "if available" indicated that additional information was not necessary to satisfy the solicitation's requirements.

The GAO (Government Accountability Office) didn't buy Graham's argument. GAO stated it found DHHS's interpretation of the solicitation, when read as a whole, is reasonable, whereas (Graham's) interpretation is not". The solicitation clearly instructed offerors to provide evidence or verification from DCAA (or another independent source).

The GAO denied the protest. The full text of the GAO decision can be found here.

Wednesday, March 6, 2019

Government Contractor Pays $250 Thousand to Resolve Discrimination Allegations

The Labor Department's Office of Federal Contract Compliance Programs (OFCCP) just reached a settlement with a Government contractor that will require the company to pay back pay and interest to settle hiring discrimination.

It all began in 2011 with a routine OFCCP compliance evaluation at GEO Group, a company specializing in privatized corrections, detention, and mental health treatment at its Joe Corley Detention Center. The OFCCP found that GEO systematically discriminated against female correctional officer applicants which, of course, is a violation of federal statutes prohibiting federal contractors from discriminating based on sex.

The settlement totaled $250 thousand and in addition to the back pay, GEO will provide job opportunities to 22 affected female applicants as correctional officer positions become available. Additionally, the contractor committed to taking steps to ensure its personnel practices, including record-keeping and internal auditing procedures, meet legal requirements.

The press release announcing this settlement did not detail specifically what GEO did that rose to the level of hiring discrimination. The fact that (i) it took about eight years to settle and (ii) it was a result of a routine audit rather than a complaint or whistleblower, indicates to us that the Government's position was not "slam-dunk". Perhaps the problem was one of record-keeping deficiencies where the contractors could not demonstrate based on records that it did not discriminate. Perhaps also the $250 thousand settlement was a business decision by GEO to get the Government off its back.

Tuesday, March 5, 2019

DoD Professional Practice Guide (Audit) - Part 2

This is the second in our series of unpacking the draft Professional Practice Guide (PPG) published by the Section 809 Panel to assist Government and commercial auditors in conducting audits of Government contracts. If you missed Part 1, click here. Yesterday's post discussed the risk assessment phase. Today we will look at the concept of 'materiality', and specifically, materiality as it relates to audits of incurred cost.

Contractors with flexibly priced contracts are required to submit annual incurred cost proposals (see FAR 52.216-7). The risk to the Government is that amounts are materially misstated due to contractors' noncompliance with contract terms or federal regulations (e.g. the Cost Principles in FAR Part 31).

The concept of materiality in the context of incurred cost audits expressly acknowledge that some degree of imperfection is acceptable to the users of financial information. There is an acceptable level of imprecision when determining or settling fair and reasonable contract prices.  This concept is often foreign to DCAA auditors who feel that no level of imprecision is acceptable - they want to audit everything and try to achieve absolute assurance.

One significant concept that auditors will need to comprehend is 'quantified materiality'. This is the numeric representation of materiality that is calculated based on the total audit subject matter. It is used in planning to identify significant cost elements. So, for example, what is the threshold over which a misstatement will effect economic decisions. On a $100,000 contract, five percent ($5,000) will unlikely influence economic decisions whereas the same percentage on a $1 billion contract ($50 million) such a misstatement would likely influence economic decisions of users.

Tomorrow we will look at how 'quantified materiality' affects the scope of audit.

Monday, March 4, 2019

DoD Professional Practice Guide (Audit) - Part 1

Back in January when the Section 809 Panel issued its third and final report, we briefly touched on their recommendation to develop a PPG (Professional Practice Guide) to guide Government auditors and commercial audit firms in conducting audits of Government contractors. This week we will dig deeper into the new guidance to see what it may portend for Government contractors. The guide itself is included in Vol 3 of the Section 809 Panel's report.

The PPG is intended to supplement existing guidance for auditors involved in DoD Procurement contract auditing. It provides additional information regarding how to interpret and apply specific auditing concepts for Government contract audits to assist auditors, contracting officers, and other stakeholders involved in the audit process.

Eventually, the PPG will address seven areas although the current draft version contains just coverage of the first three. Due to its limited statutory term, the Panel did not have time to address them all.

  1. Risk assessment
  2. Materiality
  3. Audits of Internal Controls
  4. Independence
  5. Objectivity
  6. Sufficient evidence
  7. Reliance on the work of others

Risk Assessment

The risk assessment framework provides incentives for contractors to achieve and maintain compliant cost accounting and internal controls over Government contract compliance. It also provides disincentives for those contractors who have not.

The framework provides for three levels of risk: low, medium, and high risk strata based on a contractor's ADV (auditable dollar volume). ADV is the total costs charged to flexibly priced (i.e. CPFF, CPIF, FPI, T&M, etc) each year. For contractors with ADV of $1 billion or more, an annual incurred cost audit is mandatory. At the other end of the spectrum, contractors with ADV of less than $5 million, get dumped into a sampling pool if there were no significant questioned costs in the last completed incurred cost audit and there are no "concerns" expressed by someone in the Government acquisition community concerning the particular submission. Contractors with ADV between $5 and $100 million are also in the low-risk sampling pool if they have approved accounting systems. Contractors who don't make it to the "sampling pool" are audited.

Medium risk strata include contractors with ADV between $100 million and $500 million. To make it to the sampling pool, the contractors must meed the three criteria previously discussed  plus not have any business system deficiencies on the books, nor have had any accounting practice or organization changes. Contractors in this strata, even if they make it to the sampling pool, must be audited every four or five years.

The high risk strata includes contractors with ADV between $500 million and $1 billion. It uses the same criteria as the previous strata to determine whether it makes it to the sampling pool. The only difference is that contractors in this strata must be audited at least every other year.

Tomorrow we will discuss the PPG concept of materiality.

Friday, March 1, 2019

Compensation Caps - Update

Section 702 of the Bipartisan budget Act of 2013 (BBA) established a cap of $487,000 per year on the amount the Federal Government will reimburse contractors employee compensation on contracts with defense and civilian agencies. By law, this amount must be adjusted annually to reflect the change in the Employment Cost Index for all workers, as calculated by the Department of Labor, Bureau of Labor Statistics (BLS). This cap applies to all contracts awarded after June 24, 2014.

The cap has been adjusted each year since it was instituted. For costs incurred in 2018, the cap now sits at $525,000. See the table below for adjusted cap amounts for all years.

Note, these compensation caps limits the reimbursement of compensation costs for all contractor employees on all contracts awarded by all executive agencies of the Government after June 24, 2014. For caps on executive compensation on contracts awarded prior to that date, see Allowable Compensation Costs.

One final note, these caps do not limit what contractors can pay to their employees. It only limits was contractors can request reimbursement from the Government.

Thursday, February 28, 2019

"Bait and Switch" in Government Contracting

The term "bait and switch" in Government contract law sometimes refers to cases where awardees' listed certain key personnel in their proposals, then made extensive post-award submissions. For example, a Comptroller General case used the term in a case where the awardee proposed key personnel who never authorized the awardee to use their names.

A bait-and-switch has four elements: (i) the awardee represented in its proposal that it would rely on certain specified personnel in performing the services, (ii) the agency relied on this representation in evaluating the proposal, (iii) it was foreseeable that the individuals name in the proposal would not be available to perform the contract work, and (iv) personnel other than those proposed are performing the service.

The third element is the one that ends up in dispute. Does "foreseeable" require actual knowledge or is "negligence" sufficient to establish an improper bait-and-switch. Courts have ruled that negligence is the minimum level of knowledge necessary to establish the foresee-ability element of an improper bait-and-switch. Foreseeable has a plain meaning - being such as may be reasonably anticipated and lying within the range for which forecasts are possible. It requires that an offeror knew or should have know, at the time of proposal submission, that its proposed key personnel would be unavailable to perform.

In a recent bid protest decided by U.S. Court of Federal Claims, an offeror used the resume of a certain individual without that individuals permission. When it was awarded the contract, that individual declined the employment offer so the contractor substituted a different person. One of the unsuccessful bidders appealed on the bait-and-switch grounds and won the appeal.

Wednesday, February 27, 2019

What is the ASBCA's Jurisdiction?

Appendix A to the DFARS (DoD FAR Supplement) contains the charter and rules for the Armed Services Board of Contract Appeals (ASBCA). Contractors considering an appeal of a contracting officers' decision should become familiar with these rules, even where an attorney has been retained. Familiarization with the rules will assist in understanding the process and the purposes for which attorney's do what they do.

The Appendix leads off with the ASBCA's charter - the things that it can do. Often times, when reading through cases, you will see comments related to 'jurisdiction'. Sometimes the Board will need to establish that they are the correct entity to hear the appeal. Sometimes they refuse appeals because they are outside of their jurisdiction.

The first part of the Charter reads as follows:
There is created the Armed Services Board of Contract Appeals which is hereby designated as the authorized representative of the Secretary of Defense, the Secretary of the Army, the Secretary of the Navy and the Secretary of the Air Force, in
  • hearing
  • considering and
  • determining appeals
by contractors from decisions of contracting officers or their authorized representatives or other authorities on disputed questions.
These appeals may be taken
  1. pursuant to the Contract Disputes Act of 1978 (41 USC Sections 7101-7109
  2. pursuant to the provisions of contracts requiring the decision by the Secretary of Defense or by a Secretary of a Military Department or their duly authorized representative, or
  3. pursuant to the provisions any any directive whereby the Secretary of Defense or the Secretary of a Military Department or their authorized representative has granted a right of appeal not contained in the contract or any matter consistent with the contract appeals procedure.
The Board may determine contract disputes for other departments and agencies by agreement as permitted by law. The Board shall operate under general policies established or approved by the Under Secretary of Defense responsible for acquisition and may perform other duties as directed not inconsistent with the Contract Disputes Act of 1978.
The Board shall decide the matters before it independently.
That last sentence is comforting and informative. The Board will act independently meaning they will not be coerced, manipulated, or commanded to take certain positions by powerful people within the Government or contractors.

Tuesday, February 26, 2019

President Appoints New Cost Accounting Standards Board Chair

The President has nominated Dr. Michael E. Wooten to become the Administrator, Office of Federal Procurement Policy (OFPP). As OFPP Administrator, Dr. Wooten will also serve as the Chair of the CAS Board (Cost Accounting Standards Board). Currently, those positions are filled by Lesley Field, the 'Acting' Administrator of OFPP. This appointment is subject to Senate approval.

The CAS Board met three times in 2018 and once so far in 2019. We're not sure what exactly was discussed or decided because no minutes have been published. However, based on the Board's published agendas, it seems that their current focus is on trying to conform CAS to GAAP (Generally Accepted Accounting Principles).

Here is Dr. Wooten's biography as published on the Education Department's website where he is currently the Deputy Assistant Secretary for Community Colleges. The emphasis is ours to highlight his experience in Government contracting.
Dr. Michael Eric Wooten serves as the Acting Assistant Secretary and Deputy Assistant Secretary in the Office of Career, Technical, and Adult Education. He provides leadership, direction and management for over $2 billion dollars in initiatives supporting career and technical education, adult education, correctional and re-entry education, and community colleges. These initiatives collectively serve over 25 million students annually. Dr. Wooten leads the Divisions that administer the Adult Education and Family Literacy Act (AEFLA) under the Workforce Innovation and Opportunity Act (WIOA) and the state formula and discretionary grant programs under the Carl D. Perkins Career and Technical Education Act. Dr. Wooten establishes national leadership activities to enhance the quality and rigor of educational programs, and he promotes the development of strategies that support student success. He brings more than one third of a century of government experience to the department.
Previously, Dr. Wooten served as the Deputy Chief Procurement Officer for the District of Columbia where he managed $5.2 Billion in annual contract spending through a workforce of 166 professionals. He also served as the Chief Learning Officer (CLO) for District of Columbia’s Office of Contracting and Procurement. As CLO, he designed and implemented a competency-based certification program for the District’s contract specialists. Additionally, Dr. Wooten served for seven years as a member of the Northern Virginia Community College Board; he was elected chairman of the board from 2014 through 2016. He was also selected to serve as an interim school board member for Prince William County Public Schools..
Prior to joining the District’s Office of Contracting and Procurement, Dr. Wooten served for ten years in various academic posts at Defense Acquisition University. Chief among these posts, he served as a professor of contract management, deputy department chair, and special assistant to the President of Defense Acquisition University. Mike Wooten is a 20 year veteran of the U.S. Marine Corps. His Marine Corps career culminated with service in Afghanistan followed by command of a unit of 1,200 Marines. He was retired at the rank of major.
Dr. Wooten first earned an associate’s degree from Georgia Perimeter College before earning a bachelor’s degree in psychology from Chapman University. He also holds master’s degrees from Norwich University (leadership and organizational management), the Naval Postgraduate School (acquisition and contract management), and the George Washington University (education and human development). He earned his doctorate from the University of Pennsylvania in higher education management.

Monday, February 25, 2019

DCMA and DCAA Criticized for Lack of Progress in Auditing Contractor Business Systems

Here's a post that will be of interest to major contractors - those contractors charging $100 million or more to cost type (CPFF, CPIF, FPI, T&M, etc) contracts annually.

DCAA (Defense Contract Audit Agency) is about to shift 250 auditors from performing incurred cost audits to performing audits of contractor business systems. DCAA's responsibility for oversight of contractor business systems (CBS) include (i) accounting, (ii) estimating, and (iii) MMAS or material management and accounting systems.

GAO (Government Accountability Office) recently published a report critical of the progress made by DCAA in completing these audits and of DCMA's oversight in ensuring that issues raised in those audits are resolved in a timely manner. In fiscal years 2015 through 2017, DCAA completed only three accounting system audits (none of those reported deficiencies) and nine estimating system audits (seven of which reported significant deficiencies). Some of these reviews took two to three years for DCAA to complete. Some took four and five years to resolve reported deficiencies.

According to the GAO Report, the effort expended by DCAA in auditing contractor business systems has been negligible. Normally these reviews are to be conducted on a three-year cycle however DCAA has abandoned any pretense of maintaining such a schedule. Instead, the Agency has focused on completing incurred cost audits - arguably a higher priority for the contracting community.

GAO noted that DCMA and DCAA do not have mechanisms to monitor and ensure that CBS audits are conducted in a timely manner. DCMA relies on the DCAA offices that perform the reviews of the three systems (accounting, estimating, and MMAS) to maintain the information on the reviews completed and to plan for future reviews, but DCMA does not centrally track its reviews or whether audits conducted by DCAA are being completed within the required time-frames (i.e. 70 days).

GAO recommended that DCMA and DCAA collaborate to develop a mechanism to monitor and assess whether contractor business systems reviews are being completed in a timely manner. DoD concurred.

Friday, February 22, 2019

Award Overturned Where Government Didn't Follow Stated Evaluation Criteria

NOAA (National Oceanic and Atmospheric Administration (part of the Commerce Department)  issued an RFQ (Request for Quotation) for weather and climate computing infrastructure services. The solicitation was issued as an SBA 8(a) small business set-aside and award was to be made to the vendor whose quotation represented the best value to the Government, considering (i) technical approach, (ii) corporate experience, and (iii) price.

NOAA received two quotations, one from Ace and the other from Cyberdata. NOAA's Technical Evaluation Team (TET) reviewed the quotations and assigned equal adjectival ratings to both; technical approach - acceptable; corporate experience - good; overall - good. Based on these equal adjectival ratings, NOAA's selection official concluded that price would be the determining factor and awarded the contract to Ace, whose proposal was about $2 million less than Cyberdata's.

Cyberdata protested the award, contending that NOAA failed to look behind the adjectival ratings in making its selection decision. The Comptroller General's office hearing the appeal agreed. The CG stated that adjectival ratings are not dispositive metrics for an agency to express a proposal's merit. What is important is not the scores themselves, but the underlying substantive merits of the proposals as embodied in, or reflected by the scores. Agencies must explain the basis for why proposals are considered technically equivalent.

In this case, the CG found that NOAA's selection decision did not demonstrate that the selection official meaningfully looked behind the adjectival ratings and beyond the number of strengths assessed to each vendor's quotation to determine  that the vendors' quotations were technically equal. To remedy the situation, the CG recommended that NOAA terminate Ace's contract for convenience and issue a new solicitation where where NOAA can do things correctly. Also, Cyberdata is to be reimbursed its protest costs including attorney's fees.

You can read the entire bid protest decision here.

Thursday, February 21, 2019

Compensation for Professional Employees

The Service Contract Act of 1965 was enacted to ensure that Government contractors compensate their blue blue-collar workers and some white-collar service workers fairly. However, the SCA does not cover bona fide executives, administrative, or professional employees.

Professional employees are those having a recognized status based upon acquiring professional knowledge through prolonged study. Examples include accountancy, actuarial computation, architecture, dentistry, engineering, law, medicine, nursing, pharmacy, and the sciences. To be a professional employee, a person must not only be a professional but must be involved essentially in discharging professional duties.

It is the Government's policy that all professional employees be compensated fairly and properly. To this end, contracting officers will sometimes include in solicitations a requirement for offerors to submit for evaluation a total compensation plan setting forth proposed salaries and fringe benefits for professional employees working on the contract. This solicitation clause is found at FAR 52.222-46, Evaluation of Compensation for Professional Employees. This is a required clause when the contract is expected to exceed $700 thousand and the service to be provided will require meaningful numbers of professional employees.

If this clause is included in a solicitation, offerors must submit for evaluation a total compensation plan setting forth proposed salaries and fringe benefits for professional employees who will be working on the contract. Supporting information will include data such as recognized national and regional compensation surveys and studies of professional, public, and private organizations, used in establishing the total compensation structure. Plans indicating unrealistically low professional employee compensation may be assessed adversely as one of the factors considered in making an award.

The Government has a right to be concerned about unrealistically low wages. Re-competition of service contracts may in some cases result in lowering the compensation paid to professional employees and lower wages can be detrimental to obtaining the quality of professional services needed for adequate contract performance. Therefore it is in the Government's best interest that professional employees be properly and fairly compensated.

So what does the Government look for when evaluating compensation plans? The Government will evaluate plans to assure that they reflect a sound management approach and understanding of contract requirements including an assessment of offerors' ability to provide uninterrupted high-quality work. It will be evaluated in terms of its impact on recruiting and retention, its realism, and its consistency. Other factors that the Government might consider when evaluating a compensation plan include:

  • The capability of the compensation structure to obtain and retain suitably qualified personnel to meet mission objectives.
  • Salary rates or ranges that take into account differences in skills, complexity of various disciplines, and professional job difficulty.
  • Where proposed compensation levels are lower than those of predecessor contractors, evaluating on the basis of maintaining program continuity, uninterrupted high-quality work and availability of replacements.

Unrealistic compensation plans will probably be viewed as evidence of failure to comprehend the complexity of contract requirements and failure to submit a plan at all, will cause the rejection of a proposal.

The Government estimates that about 10,000 (or so) compensation plans are submitted for evaluation each year.

Wednesday, February 20, 2019

Violations of Davis-Bacon Results in Three-Year Suspension for One Contractor

The Labor Department's Wage and Hour Division (WHD) who routinely conducts 'audits' of contractor compliance with various labor laws including the DBRA (Davis-Bacon and Related Acts) recently found four contractors working on a construction project in violation of the DBRA. Each of the four contractors were found to have shorted employees and all have agreed to pay those employees affected by the violations.

One of the contractors agreed to pay $69 thousand to 19 employees for failing to pay finishers, painters, and carpenters prevailing wage rates required by the DBRA. The contractor also failed to pay the required fringe benefits. This wasn't the first time this particular contractor ran afoul of the WHD investigators. Back in 2017, WHD investigators found other violations of DBRA and  had to pay back $99 thousand to 95 employees. Because of the repeat and willful nature of the violations, the contractor and its owner have been declared ineligible to bid on federal DBRA contracts for a period of three years. We didn't know that WHD had such authority but evidently someone other than a contracting officer can make such decisions.

The other three contractors caught up in this investigation each agreed to pay back wages and fringe benefits as well. In total, these payments reached a quarter of a million dollars.

Government contractors receive detailed agreements that include prevailing wage and fringe benefits rates, required to be paid by all contractors working on a federally funded project. Prime contractors must assure that their subcontractors adhere to these rules as well. Many times, violations are the result of contractors (and subcontractors) down-grading the skill classification of their employees and paying them lesser amounts.

The WHD press release on this case can be found here.

Tuesday, February 19, 2019

Relocation Tax Gross-Ups

Relocation costs are those incident to a permanent change of assigned work location of an existing employee or upon recruitment of a new employee. FAR 31.205-35 lists the type of relocation costs that are allowable under Government contracts and the limitations on some of the costs. One restriction that is sometimes forgotten is that the relocation must be for a period of twelve months or more. If shorter than 12 months, the costs are unallowable and if not excluded from billings or incurred cost proposals, are subject to penalties.

One of the items specifically allowable under the relocation provisions are payments for increased employee income taxes incident to allowable reimbursed relocation costs (see FAR 31.205-35(a)(10). Relocation reimbursements are taxable to the employee and the intent of the provision is to make the employee whole so that he/she won't owe additional income tax as a result of the relocation. These payments for increased taxes are commonly referred to as "gross-up" although you won't find that term in the FAR.

The Gross-Up calculation is not as obvious as one might expect. Suppose for example that relocation reimbursement is $50 thousand and the employee is in the 25 percent tax bracket. The additional taxes would be $12,000 ($50,000 times 25%). But wait a minute. The $12,000 is also taxable so you need to add tax on that amount - $12,000 times 25% = $4,000. But that's not enough. The $4,000 is also taxable so you need to add tax on that amount. And on and on.

There is a common two-step method of calculating tax gross-up. Step one is to calculate the tax gross-up factor. Step two is to apply the factor to reimbursed relocation costs. Here's an example:

1. Tax gross-up factor = employee marginal tax rate divided by 1 minus the marginal tax rate. Assuming a marginal income tax rate of 25 percent per the above example, the tax gross-up factor is 0.25/(1.0-0.25) or 0.3333.

2 Tax gross-up amount = reimbursed relocation costs times tax gross up factor. Assuming reimbursed relocation costs total $50,000, the tax gross-up amount is $16,997 ($50,000 times 0.3333).

One final note. Marginal tax rates are going to vary from employee to employee based on other non-employee features like spousal income, investments, and retirement distributions. The marginal tax rate used for gross-up calculations should be based solely on the employee's compensation from the contractor employer. In most cases, under current tax law, this will be 24 percent.

Monday, February 18, 2019

Undefinitized Contract Actions? Government May Lower Profit Percentages

Undefinitized Contract Actions (UCAs) are those contract actions for which the contract terms, specifications, or price are not agreed upon before contract performance begins (see DFARS 217.7401). UCAs are used when the negotiation of a definitive contract action is not possible in sufficient time to meet the Government's requirements and the Government's interest demands that the contractor be given a binding commitment so that contract performance can begin immediately.

Normally, UCAs must be definitized withing 180 days (six months) but there are provisions for a 90 day extension, if warranted. UCAs however cannot be definitized until the contractor submits a "qualifying proposal".

A "qualifying proposal" means a proposal containing (i) sufficient data for the DoD to do complete and meaningful analyses and audits of the data in the proposal and (ii) any other data the contracting officer has determined DoD needs to review in connection with the contract (definition at DFARS 217.7401(c)). . So, for example, if a contractor's proposal passes the proposal adequacy checklist found at DFARS 252-215-7009, we would presume it to be a "qualifying proposal".

Contractors need to submit their qualifying proposals as soon as possible. Waiting runs the risk of reduced profits. Why? Because the longer you wait, the less uncertainty there is in final cost of the contract. Costs are more likely to be based on actual costs because they've already been incurred rather than estimates of future costs.

Under the proposed regulations, the contracting officer shall assess the extent to which costs have been incurred prior to definitization of the contract action. When costs have been incurred prior to definitization, contracting officers are instructed to generally regard the contract type risk to be in the low end of the designated range. If a substantial portion of the costs have been incurred prior to definitization, the contracting officer may assign a value as low as zero percent, regardless of contract type. Zero percent profit seems pretty extreme and probably is. We've never seen a negotiated profit rate that low, regardless of circumstances.

But suppose that the reason for not definitizing a contract in a timely manner is the Government's fault. It happens. Is it fair to penalize a contractor under those circumstances? No, and the proposed regulations provide for that.
However, if a contractor submits a qualifying proposal to definitize an undefinitized contract action and the contracting officer for such action definitizes the contract after the end of the 180-day period beginning on the date on which the contractor submitted the qualifying proposal, the profit allowed on the contract shall accurately reflect the cost risk on the contractor as such risk existed on the date the contractor submitted the qualifying proposal. 
For this reason, as we stated above, it is important for contractors to submit "qualifying proposals" as soon as possible. Failure to do so jeopardizes the profit potential of the contract.

Friday, February 15, 2019

New Rule Requires Anti-Terrorism Training for Some Contractors

The proposed DFARS (DoD FAR Supplement) rule requiring mandatory anti-terrorism training for Government contractors and subcontractors that we wrote about last September (see Mandatory Antiterrorism Training for Government Contractors), has been finalized.

This new rule applies to contractors and subcontractors who require routine physical access to a Federally-controlled facility or military installation. Routine access is considered more than intermittent access, such as when a contractor employee is required to obtain a CAC card (common access card).

Training must be completed with 30 days from whenever a contractor is awarded a contract with the requisite clause (DFARS 252.204-7004, Antiterrorism Awareness Training for Contractors) and annually thereafter. Training must be completed either through DoD-sponsored and certified computer or web-based distance learning instruction or under the instruction of a qualified Level 1 anti-terrorism awareness instructor. Its our guess that most contractors will go the on-line learning route for its convenience. And anyway, where would one go to find a 'qualified' Level 1 instructor?

Contractors are required to flow-down this training requirement to its subcontractors where the subcontractor personnel requires routine access to a military installation (which by definition includes almost any defense-related facility).

Level 1 training is the most basic of training regimens. Level 1 antiterrorism training includes:

  • surveillance detection fundamentals
  • government facility security fundamentals
  • insider threat
  • active shooter fundamentals
  • residential security
  • air travel
  • ground travel
  • hotel security
  • hostage survival

Check your contract to see if it includes the DFARS 252.204-7004 antiterrorism clause. If it does, your contracting officer should be able to provide resources to meet the training requirements.

Thursday, February 14, 2019

Labor Department Announces New Voluntary Compliance Program

The Labor Department's Office of Federal Contract Compliance Programs (OFCCP) announced yesterday a new voluntary enterprise-wide compliance program for high-performing Government contractors. Acceptance into the program means your company won't be audited for compliance with laws prohibiting discrimination on the basis of race, color, religion, sex, sexual orientation, gender identity, national origin, disability or status as a protected veteran for at least five years.

OFCCP conducts compliance evaluations and has recently expanded the number of reviews performed. However, the number of evaluations conducted annually covers a fraction of the total number of contractors that fall within OFCCP's jurisdiction. This new voluntary compliance program for high-performing contractors is intended to free up limited OFCCP resources for compliance effort at contractors who do not meet the high-performing criteria. Contractors that meet the top-performing criteria will be removed from the pool of contractors scheduled for compliance evaluations.

Here's some key elements of the program:

  • It's voluntary
  • It will recognized two tiers of contractors - a top tier and a tier that needs more assistance in becoming a top tier.
  • Contractors must apply to the program.
  • During the application process, OFCCP will perform a compliance evaluation.
  • To participate, contractors will demonstrate that they meet established criteria that verifies not only basic compliance with OFCCP's requirements, but a demonstrated commitment to and application of successful programs on a corporate-wide basis.
  • To remain in the program, contractors are expected to maintain a workforce free of discrimination or other material violations, and provide periodic reports and information to OFCCP through which OFCCP can confirm these efforts.
Decisions, decisions. Will contractors want to enter the voluntary compliance program with the guarantee of a compliance evaluation at the beginning and on-going reporting requirements or take their chances that they may be one of the unlucky ones selected for a periodic compliance review. 

Read the Labor Department Directive creating the voluntary compliance program here.

Wednesday, February 13, 2019

Four Plead Guilty to Making and Accepting Bribes

The Vocational Rehabilitation and Employment (VR&E) program is a Veterans Affairs (VA) program that provides disabled U.S. Military Veterans with education and employment-related services. VR&E program counselors advise veterans under their supervision which schools to attend and facilitate payments to those schools for veterans' tuition and necessary supplies. It is a significant program within the VA budget at about $1.8 billion per year.

Counselors are given wide latitude with apparently very little oversight on making recommendations to their clients for educational and career choices. One counselor, James King, figured out a way to get rich in the process. He demanded and accepted bribes from several "for-profit, non-accredited" schools (there's a red flag right there) in exchange for steering veterans to those schools. Of course, he called it a commission - a seven percent commission.

Mr. King plead guilty to bribery, fraud, and obstruction last October and is awaiting sentencing. Three others involved in the scheme - two owners and an employee of one of the schools - also plead guilty to their roles in the bribery schemes and yesterday, were each sentenced to 20 to 30 months in federal prison.

One of the "sham" schools, Atius, received $2.2 million from the VA's VR&E program and King received $155 thousand. Students complained about the poor quality of the education provided by Atius and even resisted attending. When the VA investigated the complaints, Atius falsified records to show that students had received 32 hours of class per week when in fact, had only received six hours per week.

One of the other defendants Michelle Stevens, heard about the VR&E program and set up her own "sham" school. King helped her out by facilitating the first payment and in return, demanded his seven percent commission. Later it was discovered that students resisted attending the school. In fact, the investigation disclosed that Stevens emailed an attendance sheet for eight students to the VA that included handwritten check marks purporting to represent the dates that the students attended class. In fact, as Stevens well knew, the students had not attended class on many of those dates nor was class even held on many of those dates.

Tuesday, February 12, 2019

Navy Cancels Several of its Unique Procurement Regulations

The Federal Acquisition Regulations (FAR) system is extensive and complex. Not only do we have the basic FAR regulations, but nearly every executive agency has their own FAR supplement. These include the DFARS (Defense) which we refer to often in these pages, DEARS (Energy), NFS (NASA), AGAR (Agriculture), DOLARS (Labor), DOSARS (State), GSAM (GSA) and many many more. There are about 33 FAR Supplements in total. Companies that are seeking work with a Governmental agency would do well to familiarize themselves with the particular regulations of that agency.

Some of these FAR supplements contain cost principles not found in the FAR. Typically these supplemental cost principles are more restrictive than the corresponding cost principles found in FAR and address some particular element of cost that is not covered by FAR. The Defense, Energy, and NASA FAR supplements are three that have significant additional cost principles.

Its not often that regulations are rescinded or cancelled and so when it happens, we should perhaps celebrate. The Navy recently cancelled three of regulations found in its FAR supplement, NMCARS (Navy Marine Corps Acquisition Regulations Supplement). In each case, the regulations were determined to be duplicative of that found in FAR or DFARS. The Navy considered the rule "no longer used" (we suppose that could be the case for many procurement regulations) and "should be removed".

These removed regulations include:

  • 48 CFR Part 5242 which establishes policy and procedures for requesting refunds for spare parts or items of support equipment.
  • 48 CFR Part 5215 which establishes additional requirements for source selections, evaluation factors and proposal evaluations. These procedures were also found to be superseded by current FAR and DFARS guidance.
  • 48 CFR Part 5252 which are solicitation/contract clauses referenced in the other cancelled provisions.

Keep the momentum going. It shouldn't be too difficult to find a lot of other regulations that are "no longer used or valid and should be removed".

Monday, February 11, 2019

Energy Department Contractor Sued by Justice Department

The Department of Justice filed a civil lawsuit last week against a contractor providing security, fire protection, utilities, and information technology at DOE's Hanford (Washington) site accusing it of defrauding DOE of tens of millions of dollars.

At the time the fraud occurred, the contractor, Mission Support Alliance (MSA) was principally owned by Lockheed Martin. Also named in the Justice Department suit was two other Lockheed divisions and the former President of MSA, a Lockheed employee.

In 2010, MSA awarded a $232 million subcontract for information technology services to Lockheed Martin Services, Inc. Between 2010 and 2015, MSA misrepresented billing rates charged to DOE which allowed MSA to obtain grossly inflated and improper additional profit on the subcontract. Lockheed was doubling up on profit. The subcontractor owned by Lockheed was earning profit on its work and MSA, owned by Lockheed, earned profit on the work performed by the Lockheed-owned subcontractor.

The Justice Department has accused MSA of using half-truths, omissions, kickbacks, and outright lies to get the Energy Department to consent to the subcontract with its sister division. The kickback charge is interesting. The President of MSA, Armijo, was also a vice president of Lockheed. He and other employees were paid millions of dollars in cash and stock as part of an incentive program for improperly using their MSA positions to provide favorable treatment for Lockheed.

For its part, MSA (now owned by a new company) and Lockheed deny the allegations of fraud, corruption, and self-dealing and vow to "defend this matter vigorously". One minor figure in this matter, the former CFO, has already paid $124 thousand to resolve his liability and agreed to cooperate in the federal investigation. In agreeing to the civil settlement, he denied any wrongdoing.

The Justice Department press release on this matter can be found here.

Friday, February 8, 2019

New Executive Order to Strengthen Buy-American Preferences

The President signed out a new Executive Order (EO 13858) late last month designed to strengthen buy-American preferences for infrastructure projects. The policy, simply stated, is to maximize the use of goods, products, and materials produced in the US, in Federal procurements and through the terms and conditions of Federal financial assistance awards.

This EO extends the essential requirements of the Buy American Act to the alteration, construction, conversion, demolition, extension, improvement, maintenance, reconstruction, rehabilitation, or repair of infrastructure projects in the United States.

Infrastructure projects are projects in the following sectors: surface transportation, including roadways, bridges, railroads, and transit,; aviation; ports, including navigational channels; water resources projects; energy production, generation, and storage, including from fossil-fuels, renewable, nuclear, and hydroelectric sources; electricity transmission; gas, oil and propane storage and transmission; electric, oil, natural gas, and propane distribution systems; broadband internet; pipelines; storm-water and sewer infrastructure; drinking water infrastructure; cybersecurity; and any other sector designated later.

Agencies administering covered programs have been instructed to "encourage" contractors to use, to the greatest extent practicable, iron and aluminum as well as steel, cement, and other manufactured products produced in the US in every contract, subcontract, purchase order, or sub-award that is chargeable to the Government. Agencies have also been tasked to report to the President any tools, techniques, terms or conditions that have been used or could be used to maximize the used of domestic sources.

It will be interesting to see whether "cost" is a factor when considering foreign vs domestic sources. What if domestically produced iron and aluminum were double the cost of foreign imports? Could the term "to the maximum extent practical" be used to justify the procurement of imports in such cases?

Thursday, February 7, 2019

New Reference Guide to the Fair Labor Standards Act

Those of you who regularly follow this blog will recall several recent accounts where contractors have been fined and have had to make restitution to employees for a variety of labor law violations. Some of these violations were no doubt intentional to save costs but some, no doubt, were inadvertent because the company was not fully versed on applicable labor laws. Some violations were uncovered during routine (random?) audits by the Labor Department's Wage and Hour Division (WHD) while others came about because of whistleblower activity. In many cases, employees know their "rights" better than their employers and that makes it doubly hard on small companies and contractors who cannot afford a dedicated HR (Human Resources) position or department.

To assist employers in understanding their duties and obligations, the WHD recently launched an online version of its "Handy Reference Gide to the Fair Labor Standards Act (FSLA)". It covers minimum wage, overtime pay, record keeping, and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments.

The chapters include:

  • Basic wage standards
  • Who is covered
  • Minimum wage
  • Exemptions
  • Youth employment
  • Record keeping
  • Nursing mothers
  • Overtime
  • Enforcement
  • Prohibitions against retaliation, and more
The Reference Guide is a PDF but contains dozens of links to other source documents, tools, videos, and instructions. 

It should be noted that in addition to the labor laws covered here, each state has its own spate of laws that in some cases are even more stringent that those enforced by the Labor Department. Sick leave and minimum wages are two that come to mind where many states have been more liberal than Federal laws.

Wednesday, February 6, 2019

More Recommendations for Contract Reform

Yesterday we alerted you to a recently published report from POGO (Project on Government Oversight) entitled "Baker's Dozen: 13 Policy Areas that Require Congressional Action". One of the 13 areas involve contract reform. Within the area of contract reform, POGO made six recommendations, one of which we discussed yesterday; the idea of creating a Federal Contract Audit Agency to replace the myriad of organizations - both public and private - now tasked with contract audit oversight.

Today we will briefly describe the other five recommendations that fall under POGO's contract reform initiative. Recommendation No. 3 below seems to run counter to current trends in Government contracting where the Government is pushing commercial item acquisition to the extent that justification is often required when an acquisition is not a commercial item.

1. Need for more information on service contracts. Congress should commission a study of the federal government's use of service contracts and the performance results achieved through them. Service contracting information must be used to inform budgeting and manpower decisions as well as mission and readiness capabilities.

2. Limit the definition of non-traditional contractors. Congress needs to restore the original intent of bringing innovation to the public from non-traditional government contractors, rather than throwing billions of dollars with no oversight controls to the government's top vendors. The definition of non-traditional contractors should be revised and the rules should be changed to prohibit any contractor who has accepted a FAR contract from being eligible to receive on OTA (Other Transaction Agreement).

3. Limit when agencies can use the "commercial item" acquisition process. Congress should redefine a "commercial item" to mean goods or services that are actually sold to the general public in like quantities. Congress should also require manufacturers to share certified cost or pricing data with the government when the government is acquiring commercial goods or services on a sole-source basis, even if the awarded contract contains no flexible pricing provisions. Without such data, there is no assurance that prices are fair and reasonable.

4. Require better preparation for responding to the new normal in disasters. Congress needs to oversee improved inter-agency coordination and more realistic budgeting that allows for expanded pre-established supply stockpiles and properly vetted contracts for rapid effective disaster response. Congress should also strengthen the federal suspension and debarment system so taxpayer money is not wasted on awards to poorly performing or corrupt vendors. Finally, Congress must engage in ongoing oversight of disaster-related spending to ensure timely and effective spending and to safeguard the money from fraud and improper diversion.

5. Improve federal spending data on Congress should work with the Department of the Treasury and the Office of Management and Budget to ensure the agencies have the authority , resources, and guidance necessary to improve USASpending. Congress should also closely review the data quality and level of detail for awards reported into USASpending and demand that agencies meet higher standards for critical information around data points such as award descriptions, place of performance, and sub-recipient awards.

Tuesday, February 5, 2019

What We Need is a Federal Contract Audit Agency

The Project on Government Oversight (POGO) is a nonpartisan independent watchdog that investigates and exposes waste, corruption, abuse of power and when the government fails to serve the public or silences those who report wrongdoing. Since its founding in 1981, it has investigated a number of high profile cases of fraud, waste, and abuse within the Government and has consistently been a strong supporter of DCAA (Defense Contract Audit Agency) activities.

In addition to highlighting problems, POGO desires to be part of the solution by making recommendations to Congress and the Executive Branch to address harms exposed by its findings. Last month, POGO published the "Baker's Dozen: 13 Policy Areas that Require Congressional Action". The seventh of the thirteen recommendations is entitled: Commonsense Contract Reforms to Protect the Taxpayer. Withing this recommendation, there are six sub-recommendations regarding the need for contract reform. We will look at a few of these recommendations beginning today with a recommendation to establish a federal contract audit agency to conduct all contract audits.

The idea of establishing a federal contract audit agency is nothing new. We recall the recommendation being bandied about in the early 80's. DCAA was never officially in favor of it (wink wink) because DoD was opposed to it. In reality, there were many within the DCAA hierarchy that believed it was a good idea, not only for the empire building opportunities such an agency provided, but for consistency in auditing contracts across the full spectrum of Government purchases.

POGO has now resurrected the idea of a Federal Contract Audit Agency. In its report, POGO states:
Audits are among the most useful tools we have to check on federal contracts and ensure the money was spent wisely. But currently, contract audits are performed by numerous federal offices, including DoD's Defense Contract Audit Agency, small auditing offices in other agencies, contracted auditors, and various inspectors general. This sprawling fragmented system means missed opportunities, patchwork coverage, and limited effectiveness. A single consolidated federal contract audit agency could save more than it would cost to run by uncovering waste and fraud across the federal government.
Its recommendation to resolve this fragmentation issue and streamline the audit process is obvious:
Congress should establish a consolidated agency to provide all federal agencies with a needed check on contractors, ensuring by pre- and post-award audits that the government is not being overcharged for goods and services. Such an office would be more effective than provisions passed in the FY 2017 National Defense Authorization Act that allow defense contractors to choose their own private auditors. Those provisions should be repealed to maintain government oversight of federal defense contracts.
The reference to the FY 2017 NDAA includes a provision that DoD contract out a minimum of 20 percent of the incurred cost audit workload to private CPA firms.

See Baker's Dozen for the full report.

Monday, February 4, 2019

What is "Challenge-Based Acquisition (ChBA)?

Challenge-Based Acquisition (ChBA) is the concept where Government agencies present a need (the challenge) and potential providers are free to propose innovative solutions that fill that need.

Henry Ford once said, "If I had asked people what they wanted, they would have said 'faster horses'". But suppose that Henry Ford had heard, "I want to get to my destination  faster and with comfort and affordability". In that case, the users would have issued a concrete mission challenge - get there faster and with comfort - rather than a specified solution - a faster horse. Government acquisition tends to not think in terms of mission challenges but in terms of tighter specifications to define solutions.

ChBA is appropriate in situations where the Government's need us urgent and time critical, where no traditional solution seems viable, or where emerging technologies have the potential to provide non-traditional solutions. It may not represent a good approach for large, multi-year major system acquisitions however.

Mitre Corporation, a Federally Funded Research and Development Center (FFRDC) through the Defense Department and other Agencies publishes a ChBA handbook (now in its fourth edition) giving guidance on how agencies can and should implement ChBA. Mitre concludes that while FAR (Federal Acquisition Regulations) authorizes a broad range of approaches that support ChBA, agencies often do not take full advantage of these existing flexibilities. Some agency officials  may be reluctant to engage in innovative acquisition approaches out of fear of protests or binding the agency in an unauthorized manner. Others within the acquisition workforce may be unaware of alternative acquisition approaches that may be utilized under the current FAR. The "handbook" includes an analysis of how FAR supports the ChBA process.

There is certainly increased interest within the acquisition community on ChBA processes. It pays to be innovative.

Friday, February 1, 2019

Can the Government Consider Information that Occurs After Proposal Submission When Evaluating Proposals?

We all know that past performance and past performance evaluations play a significant role in the awarding of Government contracts. Most competitive solicitations include past performance as a significant evaluation factor and prospective contractors have the opportunity to put their best foot forward when compiling and submitting past performance information.

But what about past performance information that occurs after a proposal is submitted? That's the question that Federal Prison Industries (FPI) asked.

DLA (Defense Logistics Agency) issued a solicitation for shirts. Award was to be made on best-value trade-off basis considering (i) product demonstration models, (ii) past performance, and  (iii) price.

Proposals were submitted in February 2018 but between April and August, there were performance problems on one of FPI's other contracts. The contracting officer noted that the Marine Corps had to reduce the number of shirts issued to soldiers, which was a direct customer impact. Although the contracting officer recognized that this information was after the proposal closing date, he/she concluded that it would not be appropriate to ignore relevant past performance information. Ultimately the contracting officer decided that FPI warranted an overall marginal rating for the quality and past performance factor and an overall rating of low confidence.

Ultimately, someone other than FPI was awarded the contract so FPI appealed the award.

The protest was denied meaning that contracting officers are allowed to consider any and all information, even if that information was not available at the time of proposal submission. The GAO noted that DLA was aware of additional information pertaining to contracts that FPI itself identified as being relevant, and therefore, indicative of FPI's ability to perform the resulting requirements.GAO has consistently recognized that an agency may properly use information known by its own evaluators, as with any other references, to aid in the evaluation of proposals.

The full GAO decision is available here.

Thursday, January 31, 2019

DoD Expands Purchasing System Reviews to Include Cybersecurity Compliance

The Defense Department recently announced that it will be including contractor compliance with the DFARS (DoD FAR Supplement) rules regarding cybersecurity (DFARS 252.204-7012).

DFARS 252.204-7012, Safeguarding Covered Defense Information and Cyber Incident Reporting, requires contractors and subcontractors to implement National Institute of Standards and Technology (NIST) standards for protecting controlled unclassified information in non-federal information systems and organizations, as a means to safeguard DoD's  controlled unclassified information (CUI) that is processed, stored or transmitted on the contractor's (or subcontractor's) internal unclassified information system or network. Contractors are required to flow down this clause in subcontracts for which subcontract performance will involve CUI.

The DFARS clause is lengthy but in general, it requires adequate security systems and protections (which are defined in detail), cyber incident reporting to DoD, procedures to follow when malicious software is discovered, media protection, cyber incident damage assessment, and more.

The Under Secretary of Defense for Acquisition and Sustainment has now given the task of assuring compliance with this regulation to DCMA (Defense Contract Management Agency) who will include compliance coverage within their regularly scheduled CPSRs (Contractor Procurement System Reviews). The intent of the review (or audit) is to

  • Review contractor procedures to ensure contractual DoD requirements for marking and distribution statements on DoD CUI flow down appropriately to their suppliers, and
  • Review contractor procedures to assess compliance of the suppliers with the DFARS requirements.

DCMA has not yet revised its CPSR policies and procedures for this added coverage. When they do, we'll provide a link. In the meantime, contractors, subcontractors, and other supply-chain firms need to self-assess their level of compliance with the requirements and take whatever corrective action is necessary to ensure full compliance.

The full DoD announcement can be found here.

Wednesday, January 30, 2019

$2.75 Million Settlement for Gouging SBIR/STTR Programs

The Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs are the nation's largest Government source of early stage/high risk funding for start-ups and small businesses. To be eligible, the small business must be Americna -owned, organized as a for-profit entity, and have less than 500 employees. There are eleven federal agencies that participate in SBIR programs and five that participate in STTR programs. The largest spender of SBIR/STTR funds is the Defense Department followed closely by HHS (Health and Human Services). Together, SBIR/STTR obligations exceed $2.5 billion each year.

The Justice Department reached a $2.75 million settlement with E.M. Photonics (EMP) to resolve allegations that the company falsified labor costs and duplicative work in order to maximize charges to SBIR contracts award by the Navy, DARPA, Air Force, Energy, and NASA.

According to the Government, EMP engaged in two different schemes to defraud the programs. First, the company (and its CEO) directed EMP employees to falsify their time cards to record hours to SBIR programs while working on other projects. These inflated time cards were then used as a source to submit billings (i.e. false invoices) to the Government or payment.

The second scheme involved obtaining SBIR/STTR funding for substantially equivalent work that was already performed and funded by another Government agency. EMD falsely certified that such work was, in fact, non-duplicative.

We do not know, and the Justice Department did not disclose how this fraud was first uncovered. Given the nature of the fraud however, our first guess would be that an internal whistleblower was involved in the initial disclosure and an investigation ensured. The over-billing schemes lasted five years from 2009 to 2014 and with the announcement this week, the investigation and settlement discussions must not have been a high priority for the Government.

You can read the full Justice Department press release here.

Tuesday, January 29, 2019

Labor Department Announces Settlement in Davis-Bacon Violations

The Labor Department's Wage and Hour Division (WHD) recently announced a settlement in a case involving violations of several labor laws.

An electrical contractor performing work for the Army Corps of Engineers has agreed to pay $83 thousand in back wages and fringe benefits to seventeen employees after a Labor Department investigation found that the employer had violated requirements of the Davis-Bacon and Related Acts (DBRA), the Contract Work Hours and Safety Standards Act (CWHSSA) and the Fair Labor Standards Act (FLSA).

Investigators found that the contractor had failed to pay some employees required prevailing wage and overtime rates on a project subject to DBRA requirements by inaccurately classifying those employees as laborers instead of electrician apprentices and subsequently failed to pay them the correct wages.

The investigation further disclosed that the contractor violated the DBRA fringe benefits requirements by claiming that it had made contributions to a 401(k) plan for the benefit of employees when it had not. Additionally, the contractor claimed credit for vacation benefits but failed to meet the criteria required for such credit. Finally, the investigation disclosed that the contractor had falsified "certified payroll" records by claiming contributions to the 401(k) plan that were never made.

This case was classified as an investigation rather than the result of a routine audit which most likely means that the Labor Department was tipped off on possible DBRA violations. You can read the full Labor Department press release here.